Despite the storied history of the New York Stock Exchange, when Duncan Niederauer became chief executive on December 1, 2007, it was hardly a glorious inheritance.

The former Goldman Sachs banker faced a long to-do list, topped by the need to integrate NYSE with its European counterpart Euronext and overhauling the group’s creaking technology amid competition from nimbler rivals.

Fast-forward five years and Niederauer arguably now has an even bigger undertaking: facing severe market headwinds, NYSE Euronext needs to make up lost ground after the failed merger with Deutsche Börse. It must also diversify to benefit from a new regulatory landscape, which industry experts say is presenting huge opportunities for exchanges.

One analyst, who did not wish to be named, said: “Operationally, Niederauer has done a good job, but strategically, the jury is still out.” Rich Repetto, an analyst at Sandler O’Neill, said: “He has to be credited with bringing NYSE into the electronic era.”

This acknowledges Niederauer’s initial success at transforming NYSE from one of the few exchanges that retained an open-outcry floor into a modern financial infrastructure company.

Only eight months before Niederauer took the top job, NYSE had completed its landmark acquisition of Euronext. The $11bn deal created the world’s largest exchange by market capitalisation, but it was a disparate group.

NYSE had recently merged with rival electronic trading platform Archipelago Exchange, while Euronext was a loose combination of the Paris, Amsterdam, Brussels and Lisbon stock exchanges and London derivatives market, Liffe.

Niederauer, who had headed Goldman Sachs’s equities execution franchise – and was a former director of trading platform Archipelago – had the technological know-how and vision to move the group from multiple trading platforms towards an overarching system, called the Universal Trading Platform.

Ed Ditmire, an analyst at Macquarie Securities, said: “He stepped into a situation where NYSE was very rough around the edges. Over the years that followed the group has been modernised and brought into line with its peers, which was a mammoth and long-overdue accomplishment.”

The UTP is now in place across the group’s equities, bond and derivatives markets, and is cited as a factor in NYSE’s ability to stem market-share losses from rival share trading platforms on both sides of the Atlantic.

With the integration on track, in April 2010 Niederauer reorganised NYSE into three business lines and drivers of growth: cash equities and listings; derivatives; and information and technology services. At that time, equities and listings accounted for about half of group revenues, derivatives were responsible for just over a third, and IT made up the balance. These proportions have remained largely unchanged over the past two years.

Only IT services have seen a gradual increase, and now account for a fifth of revenues, according to the exchange’s third quarter results. In February, Niederauer outlined grand plans for this business, expecting double-digit growth this year and increasing revenues to $1bn by 2015.

In the first nine months of this year, NYSE’s revenues from IT were down 3% to $353m; derivatives revenues fell 23% to $522m, and those for cash and listings dropped 12% to $886m.

Peter Lenardos, an analyst at RBC Capital Markets, said a lack of diversification had taken some of the shine off Niederauer’s tenure: “Yes, market conditions have been tough, but investors are underwhelmed by a lack of top-line growth and a business that is still too focused on capital markets.”

Practitioners have criticised the development of NYSE’s derivatives franchise, Liffe, which, according to one analyst, has been “slow to take steps such as full self-clearing”.

New management was installed in July, following the departure of global derivatives chief Garry Jones, and the franchise continues to make ground in the US after its launch in 2008.

However, Liffe’s reliance on revenues from Europe and from short-term interest rate products will be tested as rival products come to market. Nasdaq OMX plans to launch a platform called NLX next year. This will allow users to trade both ends of the rate yield curve and clear through a single clearing pool at LCH.Clearnet.

The NLX model replicates, on a smaller scale, the logic of NYSE’s failed deal with Deutsche Börse. This would have seen Liffe move its clearing to the German group’s Eurex division, saving clients $3bn to $4bn in collateral costs, according to the exchanges.

The tie-up was to be Niederauer’s big strategic play, but it was thwarted in February by European competition authorities. Niederauer has been criticised by some for underestimating European regulatory scrutiny of the deal, while losing focus on other plans.

Ditmire said: “In hindsight, the merger was a big distraction, as the group lost time on standalone initiatives such as self-clearing, as well as improving efficiencies.”

Following the deal’s collapse, Niederauer said NYSE would reprise plans, first announced in May 2010, to build a derivatives clearing house in London. This would build on NYSE Liffe Clearing introduced in 2009, which brought some clearing functions in-house while its banking, guarantee and default management arrangements were outsourced to LCH.Clearnet.

Full self-clearing would remove its reliance on LCH.Clearnet, bringing the group into line with other major exchanges and allowing it to capitalise on regulations that will force most standardised over-the-counter derivatives through clearing houses. The facility is set to be ready for clearing UK derivatives by the end of next June, with European derivatives transferring in the first quarter of 2014.

Niederauer’s priority for now is Project 14, a cost-cutting initiative announced in April to save up to $250m a year by the end of 2014.

No area of the business is set to be untouched: staff numbers have been slashed, platforms closed, and investments, including those in Indian commodity exchange MCX and LCH.Clearnet, are to be sold.
Niederauer said last month the group had exceeded its cost-saving target for 2012, and it could not come soon enough.

Ditmire said: “NYSE is well placed to benefit from regulations that are pushing more and more business into exchanges, but management needs to get its house in order so as to benefit from them.”

• The first five years

2007: NYSE and Euronext merger completes on April 4. Niederauer appointed chief executive on December 1.

2008: Deutsche Börse and NYSE Euronext undertake merger talks but these falter over valuation. NYSE takes Liffe into the US.

On the afternoon of February 9, 2011, trading in Deutsche Börse and NYSE Euronext shares was suspended following a German media report that the companies were on the cusp of sealing a deal.

A few hours later, the exchanges issued a statement announcing they were in advanced discussions about a tie-up. Then a week later, they unveiled a formal agreement to merge in a $10.2bn transaction that would have created the largest exchange group in the world. It turned out to be the biggest thing that never happened to NYSE Euronext.

The industry logic was predicated on the strength of the exchanges’ derivatives franchises. Combining NYSE Liffe with Deutsche Börse’s Eurex would have established a colossal rates futures franchise covering the entire length of the yield curve.

Above all, the deal was a post-trade play. NYSE Liffe would redirect its derivatives and cash trading flows through Eurex’s clearing house, generating huge efficiencies for the new exchange group. The groups claimed it would save the market as much as $3bn to $4bn.

For the deal to happen, however, the bourses had to convince Europe’s antitrust regulators that these projected efficiency gains would far outweigh any competition issues that might result from the creation of the proposed derivatives giant. This was where the lobbying began. According to two lobbyists familiar with the way the deal unfolded, NYSE Euronext and Deutsche Börse quickly launched a multi-pronged campaign to convince Europe’s antitrust regulators and other influential European figures that the deal would be good for Europe and good for the market.

Champion claim

The exchanges also claimed in public statements that the new group would serve as a “champion” for the European market, creating a credible competitor to the world’s leading derivatives exchange, the US CME Group. The exchanges also claimed that Liffe and Eurex competed with the over-the-counter derivatives market.

But according to one senior European lobbyist, many in Europe were not keen on what they felt was NYSE Euronext’s aggressive lobbying style. The exchanges’ rivals, meanwhile, also operated a persuasive counter-campaign. In a note distributed to clients in July 2011 and first reported in Financial News, the London Stock Exchange claimed the combined entity would “eliminate competition” in the European-listed derivatives market. Nasdaq OMX, meanwhile, told the European Commission the deal would “establish a monopolistic situation”.

By the beginning of January 2012 – following thousands of column-inches, a hearing in Brussels and several proposed remedies – it was growing increasingly apparent that the deal was slipping away.
As the Commission College gathered to discuss the transaction at the end of January, the exchanges launched a last-ditch attempt to influence the process. In a formal letter, they petitioned Michel Barnier, the commissioner for internal market and services, to back the deal. But on January 31, Joaquín Almunia, the commissioner for competition, blocked the tie-up, arguing it would create a “near-monopoly” in the global trading of European listed derivatives.

NYSE Euronext said the Commission’s decision was based on an “incorrect determination of the relevant market definition”. Deutsche Börse is disputing this market definition in the European Court of Justice.